A merchant account is a type of bank account established under an agreement between an acceptor (i.e., a merchant accepting credit card payments) and a merchant acquiring bank for the settlement of credit card transactions. In some cases, a payment processor or independent sales organization (ISO) is also a party to the merchant agreement. Whether a merchant enters into a merchant agreement directly with an acquiring bank, or through an aggregator such as an ISO, the agreement binds the merchant to obey the operating regulations established by the credit card brands. On an average it takes a small business owner 30 days to set up a merchant account before they can start accepting credit card payments from their customers. This is mostly due to processing company policies and regulations.
Once the merchant account is set up and the merchant is ready to accept credit card payments. The cardholder presents the credit card as payment to the merchant and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (i.e., card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an authorization code, which the merchant stores with the transaction.
Authorized transactions are stored in “batches,” which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction. Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus a fee. A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder claiming deficiencies in product or service received. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.